CCM: Who will benefit if SinoChem and ChemChina really get merged

  Such news raised wide attention and caused the stock prices of related listed companies, such as SinoChem International (600500) and Yangnong Chemical (600486) to be pushed up, some stock even hit limit up, but soon after, many listed subsidiaries of the two released altogether announcements to deny the rumor in 16 Oct.

  Despite all the listed-subsidiaries belonging to the two companies released several announcements denying such thing, analyst CCM believed that such a merger between these two giants is of great strategic significance. 

  The great strategic significance

  "It is not the first time to hear the merger rumor of these two chemical giants in China,' stated Chen Zaoqun, chief editor of Herbicides China News, CCM.

  "Though both of them have denied the rumor this time, in fact, a successful merger between these two would not only even up the two companies' respective advantages and strengthen Chinese agrochemical enterprises' competitiveness in the international market, but it would also further integrate China's agricultural supply chains including pesticides, fertilizers, seeds, etc.,' stated Chen.

  "It is of great strategic significance if these two giants really get merged,' Chen added.

  Support from Chinese government

  With the on-going regrouping on central enterprises in China currently, it is of high possibility for SinoChem and ChemChina to merge. 

  On 14 July 2016, the Chinese government stated that it was actively working on the regrouping ten central enterprises into five while some other regroupings were under progress. It is hopefully that the number of central enterprises will be regrouped into less than 100 enterprises in a few years.

  Currently, there are 105 central enterprises in China. A chemical insider disclosed to CCM that if there are central enterprises to be merge in chemical industry, SinoChem and ChemChina will likely be as the targets.

  Under the circumstance that the whole chemical industry suffers from overcapacity and the bulk commodities are in downturn, the merger of SinoChem and ChemChina could help reduce competitions in the same industry and create a larger and stronger company in China in the field of chemical and agriculture.

  Even up advantages on each other

  Sinochem and ChemChina, two Chinese giants, have certain common primary businesses in the field of agriculture and chemical. A merger between them would even up the two companies' respective advantages.

  For instant, ChemChina acquired the seed Swiss giant Syngenta AG with about USD43 billion earlier this year. In fact, before the acquisition of Syngenta AG, ChemChina indirectly held the shares of ADAMA Agricultural Solutions (ADAMA), the No.7 agrochemical giant in the globe from Israel.

  Recently, Hubei Sanonda Co., Ltd., subsidiary of ChemChina announced that it would issue stocks to buy 100% shares of ADAMA.

  After the complete acquisition of Syngenta by ChemChina, China will play an important role in seed and agrochemical markets in the world. CCM predicted that its pesticide business will take up 23% of the global market share and seed business will account for 6%.

  The production and technology from the overseas companies will be introduced to China through acquisitions by ChemChina, which would also speech up SinoChem's development on seed and agrochemical markets.

  Chen stated that China is an agricultural country which wants to be one of the speakers in the international agrichemical industry. However, ChemChina developed its chemical and agrochemical fields basically through merger and acquisition. It takes time to better expand its businesses in China.

  Regarding to this, a combination ChemChina and SinoChem is quite beneficial for ChemChina to better fit in the China market, because SinoChem is one of the four China petrol companies, the largest integrated enterprise of fertilizer, seed and pesticide and very comprehensive in the whole industry chain.

  In addition, SinoChem, one of the most important natural rubber producer and supplier, planned to buy Halcyon Agri Corporation Limited, a natural rubber producer from Singapore, with SGD450 million in March 2016. If the acquisition is successful, SinoChem will be the biggest natural rubber supplier in the world hopefully.

  Chemical fertilizer is the major business for SinoChem with its subsidiary SinoFert Holdings Limited being the largest chemical fertilizer supplier. Though SinoChem has great advantages on segmented markets in the field of seeds and pesticide, SinoChem is a little inferior compared to ChemChina.

  Thus, the combination of these two would be great to make up for each other and the businesses will cover seeds, pesticides, chemical fertilizers and feeds altogether.

  Make up for shortcoming in financial business

  The constantly overseas acquisitions of ChemChina have caused high asset-liability ratio for ChemChina in recent years. The merger of these two would allow SinoChem to make up for ChemChina financial shortcoming with SinoChem decent cash flow and its financial business.

  According to earnings announcements form ChemChina, the asset-liability ratio was 84.63%、81.47% and 81.03% respectively in 2013-2015. The high asset-liability ratio to some extend will weaken debt paying ability of ChemChina and also affect its debt financing.

  Though there is no accurate data on SinoChem asset-liability ratio, according to CCM's research, its subsidiary, SinoChem Corporation's asset-liability ratio was 68.85%, 69.81%and 71.56% respectively in 2013-2015 and SinoChem Corporation is strong in anti-risk due to its smooth financing channels with the net cash flow of USD1.9 billion in business operation, up 26.47% YoY.

  In addition, SinoChem has its layout in finance marketing covering many non-bank financial businesses such as trust business, financial leasing and securities investment funds, which is a proof to show its strong financial capability.

  Enrich management experience

  SinoChem, as the first central foreign trade company in China, is experienced in foreign trading and management on overseas companies. While ChemChina is founded quite late, in 2004, the experience from SinoChem on overeas companies could be applied in the ChemChina management on overseas companies.

  In addition, both the CEO from ChemChina and SinoChem are quite distinguished in their management style. If the two enterprises could merger successfully, battling spirit from Ren Jianxin, CEO of ChemChina, and cautiousness in handling stuff from Ning Gaoning, CEO of SinoChem will combine together to create a super chemical giant.

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